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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q/A



|x |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ---------------------------------------------------------------------------------------



For The Quarterly Period Ended September 30, 2002



| ̈ |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ----------------------------------------------------------------------------------------



For The Transition Period From
 To



Commission File Number 0-26115



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INTERLIANT, INC.

(Exact Name Of Registrant As Specified In Its Charter)



|Delaware                 |  | 13-3978980                       
|------------------------ |  | ---------------------------------
|(State of Incorporation) |  | (IRS Employer Identification No.)



|Two Manhattanville Road, Purchase, New York |  | 10577     
|------------------------------------------- |  | ----------
|(Address of Principal Executive Offices)    |  | (Zip Code)



(914)
640-9000

(Registrants Telephone Number, Including Area Code)



---



(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)



Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) Yes  x  No ̈, and (2) has been subject to such filing requirements for the past 90 days. Yes  x  No ̈.



The number of shares outstanding of the Registrants Common Stock as of October 31, 2002 was
approximately 57,496,000.



This document is being
filed at this time as the review of the financial statements included herein has been completed.



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TABLE OF CONTENTS



|         |  |                                                                                                                 |  | Page No.
|-------- |  | --------------------------------------------------------------------------------------------------------------- |  | --------
|PART I.  |  | FINANCIAL INFORMATION                                                                                           |  |         
|        
|Item 1.  |  | Condensed Consolidated Balance Sheets as of September 30, 2002 and December 31, 2001                            |  | 3       
|        
|         |  | Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2002 and 2001 |  | 4       
|        
|         |  | Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2002 and 2001           |  | 5       
|        
|         |  | Notes to Condensed Consolidated Financial Statements                                                            |  | 6       
|        
|Item 2.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                           |  | 19      
|         |  |                                                                                                                 |  |         
|Item 3.  |  | Quantitative and Qualitative Disclosure of Market Risk                                                          |  | 33      
|        
|Item 4.  |  | Controls and Procedures                                                                                         |  | 33      
|        
|PART II. |  | OTHER INFORMATION                                                                                               |  |         
|        
|Item 2.  |  | Changes in Securities and Use of Proceeds                                                                       |  | 34      
|        
|Item 6.  |  | Exhibits and Reports on Form 8-K                                                                                |  | 34      



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INTERLIANT,
INC.



CONDENSED CONSOLIDATED BALANCE SHEETS



|                                                                                                                                                                                |  | September 30, 2002 |              |   | December 31, 2001 |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ------------ | - | ----------------- | -
|                                                                                                                                                                                |  | (unaudited)        |              |   |                   |  
|ASSETS                                                                                                                                                                          |  |                    |              |   |                   |  
|Current assets:                                                                                                                                                                 |  |                    |              |   |                   |  
|Cash and cash equivalents                                                                                                                                                       |  | $                  | 1,072,000    |   |                   | $
|Restricted cash                                                                                                                                                                 |  |                    | 739,000      |   |                   |  
|Accounts receivable, net of allowances of $0.5 million and $1.5 million at September 30,
2002 and December 31, 2001, respectively                                               |  |                    | 4,569,000    |   |                   |  
|Deferred costs                                                                                                                                                                  |  |                    |              |   |                   |  
|Prepaid assets                                                                                                                                                                  |  |                    | 1,711,000    |   |                   |  
|Other current assets                                                                                                                                                            |  |                    | 1,040,000    |   |                   |  
|                                                                                                                                                                                |  |                    |              |   |                   |  
|Total current assets                                                                                                                                                            |  |                    | 9,131,000    |   |                   |  
|Property and equipment, net                                                                                                                                                     |  |                    | 8,155,000    |   |                   |  
|Goodwill, net                                                                                                                                                                   |  |                    |              |   |                   |  
|Intangibles, net of accumulated amortization of $0.0 million and $17.2 million at
September 30, 2002 and December 31, 2001, respectively                                        |  |                    |              |   |                   |  
|Net assets of discontinued operations                                                                                                                                           |  |                    | 4,496,000    |   |                   |  
|Other assets                                                                                                                                                                    |  |                    | 990,000      |   |                   |  
|                                                                                                                                                                                |  |                    |              |   |                   |  
|Total assets                                                                                                                                                                    |  | $                  | 22,772,000   |   |                   | $
|                                                                                                                                                                                |  |                    |              |   |                   |  
|                                                                                                                                                                               
|LIABILITIES AND STOCKHOLDERS (DEFICIT)
EQUITY                                                                                                                                  |  |                    |              |   |                   |  
|Current liabilities:                                                                                                                                                            |  |                    |              |   |                   |  
|Notes payable and current portion of long-term debt and capital lease
obligations                                                                                               |  |                    |              |   |                   | $
|Accounts payable                                                                                                                                                                |  | $                  | 1,344,000    |   |                   |  
|Accrued expenses                                                                                                                                                                |  |                    | 3,770,000    |   |                   |  
|Deferred revenue                                                                                                                                                                |  |                    | 1,569,000    |   |                   |  
|Net liabilities of discontinued operations                                                                                                                                      |  |                    | 446,000      |   |                   |  
|Restructuring reserve                                                                                                                                                           |  |                    |              |   |                   |  
|                                                                                                                                                                                |  |                    |              |   |                   |  
|Total current liabilities                                                                                                                                                       |  |                    | 7,129,000    |   |                   |  
|Long-term debt and capital lease obligations, less current portion                                                                                                              |  |                    |              |   |                   |  
|Other long-term liabilities                                                                                                                                                     |  |                    |              |   |                   |  
|                                                                                                                                                                                |  |                    |              |   |                   |  
|Total liabilities not subject to compromise                                                                                                                                     |  |                    | 7,129,000    |   |                   |  
|                                                                                                                                                                                |  |                    |              |   |                   |  
|Liabilities subject to compromise                                                                                                                                               |  |                    | 135,724,000  |   |                   |  
|                                                                                                                                                                                |  |                    |              |   |                   |  
|Stockholders (deficit) equity:                                                                                                                                                 |  |                    |              |   |                   |  
|Preferred stock, $.01 par value; 1,000,000 shares authorized; 0 shares issued and
outstanding                                                                                   |  |                    |              |   |                   |  
|Common stock, $.01 par value; 500,000,000 shares authorized; 57,496,121, and 51,891,036
shares issued and outstanding at September 30, 2002 and December 31, 2001, respectively |  |                    | 575,000      |   |                   |  
|Additional paid-in capital                                                                                                                                                      |  |                    | 321,241,000  |   |                   |  
|Accumulated deficit                                                                                                                                                             |  |                    | (441,631,000 | ) |                   |  
|Accumulated other comprehensive loss                                                                                                                                            |  |                    | (266,000     | ) |                   |  
|                                                                                                                                                                                |  |                    |              |   |                   |  
|Total stockholders deficit                                                                                                                                                     |  |                    | (120,081,000 | ) |                   |  
|                                                                                                                                                                                |  |                    |              |   |                   |  
|Total liabilities and stockholders (deficit) equity                                                                                                                            |  | $                  | 22,772,000   |   |                   | $
|                                                                                                                                                                                |  |                    |              |   |                   |  



See
accompanying notes to condensed consolidated financial statements.



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INTERLIANT,
INC.



CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

UNAUDITED



|                                                                            |  | Three Months Ended |            |   | Nine Months Ended |  
|--------------------------------------------------------------------------- |  | ------------------ | ---------- | - | ----------------- | -
|                                                                            |  | September 30,      |            |   | September 30,     |  
|                                                                            |  | 2002               |            |   | 2001              |  
|Revenue:                                                                    |  |                    |            |   |                   |  
|Service revenues                                                            |  | $                  | 8,249,000  |   |                   | $
|Product revenues                                                            |  |                    | 1,477,000  |   |                   |  
|                                                                            |  |                    |            |   |                   |  
|Total revenue                                                               |  |                    | 9,726,000  |   |                   |  
|                                                                            |  |                    |            |   |                   |  
|                                                                           
|Costs and expenses:                                                         |  |                    |            |   |                   |  
|Cost of service revenue                                                     |  |                    | 4,723,000  |   |                   |  
|Cost of product revenue                                                     |  |                    | 1,211,000  |   |                   |  
|                                                                            |  |                    |            |   |                   |  
|Cost of revenue                                                             |  |                    | 5,934,000  |   |                   |  
|Sales and marketing                                                         |  |                    | 2,157,000  |   |                   |  
|General and administrative (exclusive of non-cash compensation shown
below) |  |                    | 5,162,000  |   |                   |  
|Non-cash compensation                                                       |  |                    | 61,000     |   |                   |  
|Depreciation                                                                |  |                    | 1,401,000  |   |                   |  
|Amortization of intangibles                                                 |  |                    |            |   |                   |  
|Restructuring charge                                                        |  |                    |            |   |                   |  
|Impairment losses                                                           |  |                    | 5,000      |   |                   |  
|                                                                            |  |                    |            |   |                   |  
|                                                                            |  |                    | 14,720,000 |   |                   |  
|                                                                            |  |                    |            |   |                   |  
|Loss before interest, reorganization items and other income                 |  |                    | (4,994,000 | ) |                   |  
|Gain on sale of businesses                                                  |  |                    | 1,182,000  |   |                   |  
|Other income (expense), net                                                 |  |                    | 86,000     |   |                   |  
|Interest expense, net                                                       |  |                    | (799,000   | ) |                   |  
|Reorganization items, net                                                   |  |                    | (1,219,000 | ) |                   |  
|                                                                            |  |                    |            |   |                   |  
|Loss before minority interest and discontinued operations                   |  |                    | (5,744,000 | ) |                   |  
|Minority interest                                                           |  |                    |            |   |                   |  
|                                                                            |  |                    |            |   |                   |  
|Loss before discontinued operations                                         |  |                    | (5,744,000 | ) |                   |  
|Gain (loss) from discontinued operations                                    |  |                    | 300,000    |   |                   |  
|                                                                            |  |                    |            |   |                   |  
|Net loss                                                                    |  | $                  | (5,444,000 | ) |                   | $
|                                                                            |  |                    |            |   |                   |  
|Basic and diluted loss per share:                                           |  |                    |            |   |                   |  
|Loss before discontinued operations                                         |  | $                  | (0.10      | ) |                   | $
|Discontinued operations                                                     |  |                    | 0.01       |   |                   |  
|                                                                            |  |                    |            |   |                   |  
|Net loss                                                                    |  | $                  | (0.09      | ) |                   | $
|                                                                            |  |                    |            |   |                   |  
|Weighted average shares outstanding  basic and diluted                     |  |                    | 57,384,000 |   |                   |  
|                                                                            |  |                    |            |   |                   |  

See accompanying notes to condensed consolidated financial statements.



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INTERLIANT,
INC.



CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

UNAUDITED



|                                                           |  | Nine Months Ended September 30, |            
|---------------------------------------------------------- |  | ------------------------------- | -----------
|                                                           |  | 2002                            |            
|Operating activities                                       |  |                                 |            
|Net cash used in operating activities                      |  | $                               | (8,735,000 
|                                                           |  |                                 |            
|Investing activities                                       |  |                                 |            
|Purchases of property and equipment                        |  |                                 | (1,730,000 
|Sales and purchases of short-term investments, net         |  |                                 |            
|Proceeds from sales of businesses, net of costs            |  |                                 | 4,025,000  
|Acquisitions of businesses, net of cash acquired           |  |                                 | (699,000   
|                                                           |  |                                 |            
|Net cash provided by investing activities                  |  |                                 | 1,596,000  
|                                                           |  |                                 |            
|Reorganization activities                                  |  |                                 |            
|Net cash used in reorganization activities                 |  |                                 | (1,533,000 
|                                                           |  |                                 |            
|Financing activities                                       |  |                                 |            
|Proceeds from sale of common stock                         |  |                                 | 8,000      
|Proceeds from exercise of options and warrants             |  |                                 |            
|Proceeds from sale/leaseback of equipment and furniture    |  |                                 |            
|Proceeds from issuance of debt and capital lease financing |  |                                 | 19,150,000 
|Payment in connection with debt restructuring              |  |                                 | (1,945,000 
|Repayment of debt and capital leases                       |  |                                 | (12,844,000
|                                                           |  |                                 |            
|Net cash provided by financing activities                  |  |                                 | 4,369,000  
|                                                           |  |                                 |            
|Effect of exchange rate changes on cash                    |  |                                 | 4,000      
|Net decrease in cash and cash equivalents                  |  |                                 | (4,299,000 
|Cash and cash equivalents at beginning of period           |  |                                 | 5,371,000  
|                                                           |  |                                 |            
|Cash and cash equivalents at end of period                 |  | $                               | 1,072,000  
|                                                           |  |                                 |            



See Notes
to Condensed Consolidated Financial Statements



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Notes to Condensed Consolidated Financial Statements September 30, 2002 (unaudited)



1. BUSINESS



Interliant, Inc. (OTC-BB:-INIT.OB), (the Company), is a provider of managed infrastructure solutions, encompassing messaging, security, and hosting, plus an integrated set of professional services that differentiate and add customer
value to these core solutions. The Company provides companies of all sizes with cost-effective, secure infrastructure and a focused suite of e-business solutions.



In July 2002, the Companys Common Stock was delisted from Nasdaq National Market and began trading on the Over The
Counter Bulletin Board.



The Company was organized under the laws
of the State of Delaware on December 8, 1997. Web Hosting Organization LLC (WEB), a Delaware Limited Liability Company, is the largest single shareholder, owning 47% of the Companys issued and outstanding shares of common stock (Common Stock)
as of September 30, 2002. WEBs investors comprise Charterhouse Equity Partners III, L.P. and Chef Nominees Limited (collectively, CEP Members), and WHO Management, LLC (WHO).



For the period from inception to September 30, 2002, the Company has incurred net losses and negative cash flows from
operations, and has also expended significant funds for capital expenditures (property and equipment) and the acquisitions of businesses. As of September 30, 2002, the Company had working capital of $2.0 million, including cash and cash equivalents
of $1.1 million.



On August 5, 2002 (the Filing Date) the Company
and its domestic subsidiaries (including indirectly owned subsidiaries) (collectively Debtors) filed voluntary petitions in the United States Bankruptcy Court for the Southern District of New York (the Court) for reorganization under Chapter 11 (the
Bankruptcy Case) of the United States Bankruptcy Code (the Bankruptcy Code) under the following case numbers: Interliant, Inc. (02-23150), Interliant Acquisition Corp. (02-23151), Interliant Association Solutions, Inc. (02-23153), Interliant
Consulting and Professional Services, Inc. (02-23155), Interliant International, Inc. (02-23159), Interliant Services, Inc. (02-23162), Interliant Texas, Inc. (02-23166), The Jacobson Consulting Group, Inc. (02-23168), rSP Insurance Agency, Inc.
(02-23158), SL Successor Corp. (02-23160), Soft Link Holding Corp. (02-23161), and TP Successor Corp. (02-23163). The Companys United Kingdom subsidiaries are not included in the Chapter 11 filing.



The necessity for filing under the Bankruptcy Code, in addition to the
continued negative cash flow from operations, was attributable primarily due to the Companys inability to collect funds due in connection with the prior sales of business units, a delay in the anticipated sale of one of its business units and
continued weakening of market conditions.



The outstanding
principal of, and accrued interest on substantially all long-term debt of the Debtors became immediately due and payable as a result of the commencement of the Bankruptcy Case. However, the vast majority of the claims in existence at the Filing Date
(including claims for principal and accrued interest and substantially all legal proceedings) are stayed (deferred) while the Company continues to manage its businesses. The Court has, upon motion by the Debtors, permitted the Debtors to pay or
otherwise honor certain unsecured pre-Filing Date claims, including employee wages and benefits and customer claims in the ordinary course of business, subject to certain limitations. The Debtors also have the right to assume or reject executory
contracts, subject to Court approval and certain other limitations.



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In this context,
assumption means that the Debtors agree to perform their obligations and cure certain existing defaults under an executory contract and rejection means that the Debtors are relieved from its obligations to perform further
under an executory contract and are subject only to a claim for damages for the breach thereof. Any claim for damages resulting from the rejection of an executory contract is treated as a general unsecured claim in the Bankruptcy Case.



Generally, pre-Filing Date claims against the Debtors fall into two
categories: secured and unsecured, including certain contingent or unliquidated claims. Under the Bankruptcy Code, a creditors claim is treated as secured only to the extent of the value of the collateral securing such claim, with the balance
of such claim being treated as unsecured. Unsecured and partially secured claims do not accrue interest after the Filing Date. A fully secured claim, however, does accrue interest after the Filing Date until the amount due and owing to the secured
creditor, including interest accrued after the Filing Date, is equal to the value of the collateral securing such claim. The amount and validity of pre-Filing Date contingent or unliquidated claims, although presently unknown, ultimately may be
established by the Court or by agreement of the parties. As a result of the Bankruptcy Case, additional pre-Filing Date claims and liabilities may be asserted, some of which may be significant. No provision has been included in the accompanying
financial statements for such potential claims and additional liabilities that may be filed on or before November 27, 2002, the date fixed by the Court as the last day to file proofs of claim (Bar Date).



The Companys objective is to achieve the highest possible recoveries for
all creditors and stockholders, consistent with the Debtors ability to pay and to continue the operation of their businesses. However, there can be no assurance that the Debtors will be able to attain these objectives or to achieve a
successful reorganization. In addition, the liabilities of the Debtors may be found in the Bankruptcy Cases to exceed the fair value of their assets, resulting in claims being paid at less than 100% of their face value and the equity of the
Companys stockholders being diluted or cancelled.



Under
the Bankruptcy Code, the rights of and ultimate payments to pre-Filing Date creditors and stockholders may be substantially altered from their contractual terms. At this time, it is not possible to predict the outcome of the Bankruptcy Case, in
general, or the effect of the Bankruptcy Case on the businesses of the Debtors or on the interests of creditors and stockholders.



The Debtors anticipate that substantially all liabilities of the Debtors as of the Filing Date will be resolved under one or more plans of reorganization
to be proposed and voted on in the Bankruptcy Case in accordance with the provisions of the Bankruptcy Code. Although the Debtors intend to file and seek confirmation of such a plan or plans, there can be no assurance that the Debtors will file such
a plan or plans, and that if the Debtors do file such a plan or plans then as to when such plan or plans will be confirmed by the Court and consummated.



Pursuant to an order entered by the Bankruptcy Court, the Company has obtained from a financial institution Debtor-In-Possession (DIP) financing, under
which the Company can borrow up to $5.0 million based on the amount of its eligible accounts receivable, and the Company has pledged substantially all its assets as security against this financing. The Company expects this financing will
provide it with sufficient funds to operate its businesses until a reorganization plan is completed, although there can be no assurance in this regard.



The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the
liquidation of liabilities in the ordinary course of business. However, as a result of the Bankruptcy Cases, such realization of assets and liquidation of liabilities are subject to a significant number of uncertainties. As a result of the
Bankruptcy Cases, certain liabilities



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which previously had been
classified as non-current liabilities on the Companys balance sheet may have become immediately due and payable pursuant to the terms of the underlying agreements. Therefore, the Company has classified such liabilities on the balance sheet as
Liabilities Subject To Compromise. Under the Bankruptcy Code, substantially all of such liabilities are stayed (deferred) while the Company continues to manage the business.



In accordance with AICPA Statement of Position 90-7 (SOP 90-7), Financial Reporting by Entities in
Reorganization under the Bankruptcy Code, condensed combined debtor-in-possession financial statements of the Debtors, excluding the UK subsidiaries, are presented below. Such financial statements have been prepared on the same basis as the
condensed consolidated financial statements and include intercompany receivables and investments in non-Debtor subsidiaries at cost and are presented as follows:



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INTERLIANT,
INC.

Condensed Combined Debtor-in-Possession Statements of Operations

(unaudited)



|(In thousands)                                                              |  | Three Months Ended September 30, 2002 |        |   | Nine Months Ended September 30, 2002 |  
|--------------------------------------------------------------------------- |  | ------------------------------------- | ------ | - | ------------------------------------ | -
|Revenue:                                                                    |  |                                       |        |   |                                      |  
|Service revenues                                                            |  | $                                     | 6,936  |   |                                      | $
|Product revenues                                                            |  |                                       | 1,358  |   |                                      |  
|                                                                            |  |                                       |        |   |                                      |  
|Total revenue                                                               |  |                                       | 8,294  |   |                                      |  
|                                                                            |  |                                       |        |   |                                      |  
|Costs and expenses:                                                         |  |                                       |        |   |                                      |  
|Cost of service revenue                                                     |  |                                       | 4,177  |   |                                      |  
|Cost of product revenue                                                     |  |                                       | 1,136  |   |                                      |  
|                                                                            |  |                                       |        |   |                                      |  
|Cost of revenue                                                             |  |                                       | 5,313  |   |                                      |  
|Sales and marketing                                                         |  |                                       | 1,848  |   |                                      |  
|General and administrative (exclusive of non-cash compensation shown
below) |  |                                       | 4,854  |   |                                      |  
|Non-cash compensation                                                       |  |                                       | 61     |   |                                      |  
|Depreciation                                                                |  |                                       | 1,163  |   |                                      |  
|Amortization of intangibles                                                 |  |                                       |        |   |                                      |  
|Restructuring charge                                                        |  |                                       |        |   |                                      |  
|Impairment losses                                                           |  |                                       | 5      |   |                                      |  
|                                                                            |  |                                       |        |   |                                      |  
|                                                                            |  |                                       | 13,244 |   |                                      |  
|                                                                            |  |                                       |        |   |                                      |  
|Loss before interest, reorganization items and other income                 |  |                                       | (4,950 | ) |                                      |  
|Gain on sale of businesses                                                  |  |                                       | 1,182  |   |                                      |  
|Other income (expense), net                                                 |  |                                       | 94     |   |                                      |  
|Interest expense, net                                                       |  |                                       | (771   | ) |                                      |  
|Reorganization costs, net                                                   |  |                                       | (1,219 | ) |                                      |  
|                                                                            |  |                                       |        |   |                                      |  
|Loss before discontinued operations                                         |  |                                       | (5,664 | ) |                                      |  
|Gain (loss) from discontinued operations                                    |  |                                       | 300    |   |                                      |  
|                                                                            |  |                                       |        |   |                                      |  
|Net loss                                                                    |  | $                                     | (5,364 | ) |                                      | $
|                                                                            |  |                                       |        |   |                                      |  



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INTERLIANT,
INC.

Condensed Combined Debtor-in-Possession Balance Sheets

(unaudited)



|(In thousands)                                                                                                              |  | September 30, 2002 |         
|--------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | --------
|ASSETS                                                                                                                      |  |                    |         
|Current assets:                                                                                                             |  |                    |         
|Cash and cash equivalents                                                                                                   |  | $                  | 725     
|Restricted cash                                                                                                             |  |                    | 739     
|Accounts receivable, net of allowances of $0.6 million                                                                      |  |                    | 3,631   
|Prepaid assets                                                                                                              |  |                    | 1,562   
|Other current assets                                                                                                        |  |                    | 1,039   
|                                                                                                                            |  |                    |         
|Total current assets                                                                                                        |  |                    | 7,696   
|Property and equipment, net                                                                                                 |  |                    | 7,205   
|Goodwill, net                                                                                                               |  |                    |         
|Intangibles, net of accumulated amortization of $8.4 million                                                                |  |                    |         
|Investment in unconsolidated subsidiary                                                                                     |  |                    | 1,480   
|Net assets of discontinued operations                                                                                       |  |                    | 4,496   
|Other assets                                                                                                                |  |                    | 914     
|                                                                                                                            |  |                    |         
|Total assets                                                                                                                |  | $                  | 21,791  
|                                                                                                                            |  |                    |         
|                                                                                                                           
|LIABILITIES AND STOCKHOLDERS (DEFICIT)
EQUITY                                                                              |  |                    |         
|Current liabilities:                                                                                                        |  |                    |         
|Accounts payable                                                                                                            |  | $                  | 1,159   
|Accrued expenses                                                                                                            |  |                    | 3,151   
|Deferred revenue                                                                                                            |  |                    | 1,126   
|Net liabilities of discontinued operations                                                                                  |  |                    | 446     
|                                                                                                                            |  |                    |         
|Total current liabilities                                                                                                   |  |                    | 5,882   
|                                                                                                                            |  |                    |         
|Liabilities subject to compromise                                                                                           |  |                    | 135,724 
|                                                                                                                            |  |                    |         
|Stockholders (deficit) equity:                                                                                             |  |                    |         
|Preferred stock, $.01 par value; 1,000,000 shares authorized; 0 shares issued and
outstanding                               |  |                    |         
|Common stock, $.01 par value; 500,000,000 shares authorized; 57,496,121 shares issued
and outstanding at September 30, 2002 |  |                    | 575     
|Additional paid-in capital                                                                                                  |  |                    | 321,241 
|Accumulated deficit                                                                                                         |  |                    | (441,631
|                                                                                                                            |  |                    |         
|Total stockholders deficit                                                                                                 |  |                    | (119,815
|                                                                                                                            |  |                    |         
|Total liabilities and stockholders (deficit) equity                                                                        |  | $                  | 21,791  
|                                                                                                                            |  |                    |         



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INTERLIANT,
INC.

Condensed Combined Debtor-in-Possession Statements of Cash Flows

(unaudited )



|(In thousands)                                             |  | Nine Months Ended September 30, 2002 |        
|---------------------------------------------------------- |  | ------------------------------------ | -------
|Operating activities                                       |  |                                      |        
|Net cash used in operating activities                      |  | $                                    | (8,783 
|                                                           |  |                                      |        
|Investing activities                                       |  |                                      |        
|Purchases of property and equipment                        |  |                                      | (1,725 
|Proceeds from sales of businesses, net of costs            |  |                                      | 4,025  
|Acquisitions of businesses, net of cash acquired           |  |                                      | (699   
|                                                           |  |                                      |        
|Net cash provided by investing activities                  |  |                                      | 1,601  
|                                                           |  |                                      |        
|Reorganization activities                                  |  |                                      |        
|Net cash used in reorganization activities                 |  |                                      | (1,533 
|                                                           |  |                                      |        
|Financing activities                                       |  |                                      |        
|Proceeds from sale of common stock                         |  |                                      | 8      
|Proceeds from issuance of debt and capital lease financing |  |                                      | 19,150 
|Payment in connection with debt restructuring              |  |                                      | (1,945 
|Repayment of debt and capital leases                       |  |                                      | (12,874
|                                                           |  |                                      |        
|Net cash provided by financing activities                  |  |                                      | 4,339  
|                                                           |  |                                      |        
|Net decrease in cash and cash equivalents                  |  |                                      | (4,376 
|Cash and cash equivalents at beginning of period           |  |                                      | 5,101  
|                                                           |  |                                      |        
|Cash and cash equivalents at end of period                 |  | $                                    | 725    
|                                                           |  |                                      |        



2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



Basis of Presentation



The consolidated
financial statements include the accounts of the Company and its wholly and majority owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.



Interim Financial Information



The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally
accepted in the United States for interim financial information and with the regulations of the Securities and Exchange Commission (SEC), but omit certain information and footnote disclosure necessary to present the statements in accordance with
accounting principles generally accepted in the United States. The interim financial information as of September 30, 2002 and for the three and nine month periods ended September 30, 2002 and 2001 is unaudited and has been prepared on substantially
the same basis as the audited consolidated financial statements included in the Companys annual report on Form 10-K for the year ended December 31, 2001, with the exception of the classification of liabilities subject to compromise.
Liabilities subject to compromise have been reported



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in accordance with SOP 90-7,
and on a going concern basis, which contemplates continuity of operations, realization of assets and liquidation of liabilities in the ordinary course of business. In the opinion of management, such unaudited information includes all adjustments
(consisting only of normal recurring adjustments) necessary for a fair presentation of the interim information.



The balance sheet at December 31, 2001 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by accounting
principles generally accepted in the United States for complete financial statements.



For further information, refer to the Financial Statements and Notes thereto and Managements Discussion and Analysis of Financial Condition and Results of Operations included in the Companys Annual Report on Form
10-K. Operating results for the three and nine month periods ended September 30, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002.



Accounting Change



In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations, (SFAS 141) and SFAS No. 142, Goodwill and Other Intangible Assets(SFAS 142), effective for fiscal years beginning after December 15, 2001. Under
the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over
their useful lives.



The Company has applied the new rules on
accounting for goodwill and other intangible assets beginning in the first quarter of 2002. Application of the non-amortization provisions of the Statement has reduced the Companys net loss by approximately $4.2 million, which is based on the
amortization that would have been recorded without the mandated change. During 2002, the Company performed the first of the required impairment tests of goodwill and indefinite lived intangible assets as of January 1, 2002 and has recorded a charge
of $29.4 million to reflect impairment evident in such assets (see Note 7).



On August 1, 2001, the FASB issued SFAS No. 144, Accounting For Impairment of Long-Lived Assets (SFAS 144). The Company adopted this pronouncement beginning January 1, 2002. SFAS 144 prescribes the accounting for the
impairment of long-lived assets (excluding goodwill), and long-lived assets to be disposed of by sale. SFAS 144 retains the requirement of SFAS 121 to measure long-lived asset classified as held for sale at the lower of its carrying value or fair
market value less the cost to sell. Therefore, discontinued operations are no longer measured on a net realizable basis, and future operating results are no longer recognized before they occur.



Use of Estimates



The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent liabilities, at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.



Net Loss Per Share



Net loss per share is presented in accordance with the provisions of SFAS 128, Earnings Per Share. Basic net loss per share is computed based
on the weighted average number of shares of common stock



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outstanding during the period.
Diluted loss per share does not differ from basic loss per share since potential common shares to be issued upon the exercise of stock options, warrants and conversion of notes are anti-dilutive for the periods presented.



3. DISPOSITIONS OF BUSINESSES



In January 2002, the Company sold the assets of its subsidiary Telephonetics,
Inc. to a company formed by Stephen Maggs, a founder and former member of the Board of Directors of the Company. The total sales price was $1.6 million of which $0.6 million was in cash and the balance was in the form of promissory notes and the
assumption of debt. Notes in the amount of $0.4 million were due in 2002 of which $0.2 million was paid in the first nine months of 2002. The remaining note of $0.6 million is due in annual installments of $0.2 million in December 2003, 2004 and
2005.



In February 2002, the Company sold the assets of its
subsidiary Softlink, Inc. to a subsidiary of Springbow Solutions, Inc. The sales price was $3.8 million of which $3.3 million was paid in cash to the Company and $0.5 million was paid to a former owner of Softlink as part of the contingent
consideration provision of the Interliants original purchase agreement with Softlink.



In May 2002, the Company sold the assets of one of the business units included in its consulting business for nominal consideration. In connection with the sale, an impairment loss of $1.0 million was
recorded in the three months ended March 31, 2002.



Pursuant to
an order entered by the Bankruptcy Court in September 2002, the Company disposed of its Boston based security products and services business (the SSG Business). The disposition was accomplished by arranging for a Boston based provider of
security products and services to begin servicing the existing customers of the SSG Business. The Company received $0.2 million in cash consideration for these arrangements.



The combined gain on the sale of these businesses, including the receipt of contingent consideration payments for businesses
sold in the prior year, was $6.6 million, which is included in Other Income.



4. DEBT



In March
2002, Charterhouse Equity Partners III L.P., and Mobius Technology Ventures VI, LP (formerly Softbank) and its affiliates (collectively the Investors) purchased an aggregate of $10.0 million of the Companys 10% Convertible
Subordinated Notes due March 2005 (10% Subordinated Notes) and warrants to purchase 10.0 million shares of the Companys Common Stock at $0.30 per share. The 10% Subordinated Notes are convertible into the Companys Common Stock at $0.30
per share, and the warrants are exercisable for five years. Interest on the 10% Subordinated Notes may be paid in cash or the issuance of additional 10% Subordinated Notes at the Companys option. In addition, the Investors, or other persons
acceptable to the Company, may purchase up to an additional $10.0 million of the 10% Subordinated Notes and related warrants. The fair value of the warrants which were allocated to the total proceeds received was $2.3 million and will be charged to
interest expense over the term of the 10% Subordinated Notes. These notes also contain a beneficial conversion feature amounting to approximately $2.7 million, which was charged to interest expense upon the receipt of the proceeds.



In May 2002, the Company entered into an Accounts Receivable Financing
agreement (Accounts Receivable Financing) under which it was able to borrow up to $7.5 million, pledging its accounts receivable and certain other assets as collateral. The definitive agreements provided for a loan term of one year with interest at
prime plus 2% on amounts borrowed. As part of the Accounts Receivable



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Financing, the Company issued
warrants to the lender to purchase 1,250,000 shares of Common Stock at $0.30 per share. The fair value of the warrants was $0.3 million, which is being amortized over twelve months beginning in May 2002. As a result of the Bankruptcy Case, the
Companys ability to borrow under the Accounts Receivable Financing was terminated, and as of September 30, 2002, no amounts were outstanding thereunder.



Pursuant to an order entered by the Bankruptcy Court in September 2002, the Company completed the DIP financing agreement under which it can borrow up to
$5.0 million pledging its accounts receivable and substantially all of its other assets as collateral. The definitive agreement provides for a loan term of one year with interest at prime plus 1% on amounts borrowed subject to increases in the rate
upon the occurrence of certain events. Borrowings under the DIP Financing are based on a percentage of eligible receivables as defined in the definitive agreements. At September 30, 2002, no amounts were outstanding under DIP Financing.



5. STOCKHOLDERS EQUITY



Common Stock



In April 2002, the Company amended its agreement with The Feld Group for
executive services rendered and to be rendered from January 2002 through December 31, 2002. In lieu of any cash compensation for this period, The Feld Group received 2,333,335 shares of Common Stock through July 31, 2002, along with cash
reimbursement for out-of-pocket expenses, pursuant to this agreement. As of July 31, 2002, this agreement was terminated and no further issuances of stock will be made thereunder. Also pursuant to the April 2002 amended agreement, a nominee of The
Feld Group received warrants to purchase 1,200,000 shares of Common Stock at a price of $0.30 per share. Upon termination of the agreement, warrants for 500,000 shares were cancelled. The fair value of the vested warrants ($0.1 million) was charged
to expense over seven months through July 31, 2002.



In March
2002, certain of the Companys executive officers agreed to take an aggregate of 1.1 million restricted shares of Common Stock in lieu of a portion of their cash compensation for the year ending December 31, 2002. In addition, the Company
amended the employment agreement of one of the Companys Co-chairmen, extending the term from May 31, 2002 to May 31, 2003 and issued him 500,000 restricted shares of Common Stock in lieu of cash compensation for the extended term.



During the nine months ended September 30, 2002, holders of $1.6
million of the Companys 10% Senior Convertible Notes converted such notes into 1.6 million shares of Common Stock.



Stock Options



During the nine months ended September 30, 2002, under the 1998 Stock Option Plan (the Plan), the Company granted options to purchase 1.4 million shares
of Common Stock at exercise prices ranging from $0.20 to $1.00 per share. The weighted-average exercise price of the options granted was $0.43 per share.



As of September 30, 2002, options to purchase 9.1 million shares of Common Stock under the Plan were outstanding, of which options to purchase 4.7 million
shares were vested.



6.
RESTRUCTURING CHARGES



Based on a decision reached by management
and the Board of Directors in July 2001, the Company announced a restructuring plan on July 31, 2001 (July Plan or restructuring) designed to further reduce the



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ongoing operating expenses of
the Company in light of the continued uncertainties in the economy in general, certain weaknesses in the market for IT outsourcing services, and lack of revenue growth for the Company in particular.



The July Plan comprised workforce reductions of approximately 70 positions and
the exit of certain leased facilities. All 70 positions were eliminated as of the end of 2001. Initially, the Company retained licensed real estate brokers to actively market each of the identified leased facilities to be exited. However, subsequent
to the Filing Date, agreements have been made to exit or enter into new or modified leases with reduced square footage in each of the identified facilities.



The following table summarizes the financial status of the July 2001 restructuring reserve:



|(In thousands)                                                   |  | Total July 2001 Restructuring |        |   | Severance and related costs |   |      | Exit leased facilities | 
|---------------------------------------------------------------- |  | ----------------------------- | ------ | - | --------------------------- | - | ---- | ---------------------- | 
|Total reserve charged to expense:                                |  |                               |        |   |                             |   |      |                        | 
|For year ended December 31, 2001                                 |  | $                             | 3,578  |   |                             | $ | 646  |                        | 
|For quarter ended March 31, 2002                                 |  |                               | 248    |   |                             |   |      |                        | 
|                                                                 |  |                               |        |   |                             |   |      |                        | 
|Total reserve charged to expense                                 |  |                               | 3,826  |   |                             |   | 646  |                        | 
|Total reserve credited to reorganization costs:                  |  |                               |        |   |                             |   |      |                        | 
|For quarter ended September 30, 2002                             |  |                               | (1,095 | ) |                             |   |      |                        | 
|Total reserve reclassified to liabilities subject to compromise: |  |                               |        |   |                             |   |      |                        | 
|For quarter ended September 30 2002                              |  |                               | (143   | ) |                             |   |      |                        | 
|Cash Charges Against Reserve:                                    |  |                               |        |   |                             |   |      |                        | 
|For year ended December 31, 2001                                 |  |                               | (1,359 | ) |                             |   | (646 | )                      | 
|For quarter ended March 31, 2002                                 |  |                               | (405   | ) |                             |   |      |                        | 
|For quarter ended June 30, 2002                                  |  |                               | (284   | ) |                             |   |      |                        | 
|For quarter ended September 30, 2002                             |  |                               | (496   | ) |                             |   |      |                        | 
|Non-cash Charges Against Reserve:                                |  |                               |        |   |                             |   |      |                        | 
|For year ended December 31, 2001                                 |  |                               | (44    | ) |                             |   |      |                        | 
|                                                                 |  |                               |        |   |                             |   |      |                        | 
|Balance as of September 30, 2002                                 |  | $                             |        |   |                             | $ |      |                        | 
|                                                                 |  |                               |        |   |                             |   |      |                        | 



7. ASSET IMPAIRMENT LOSSES



During the first
quarter of 2002, and in connection with the pending sale of a portion of its professional services business, the Company determined that the carrying value of the intangible assets associated with that business was impaired based on the sales price
of the business. Accordingly, an impairment loss of $1.0 million was recorded in the three months ended March 31, 2002.



During the second quarter of 2002, the Company re-evaluated the future prospects of the security products and services and Oracle consulting businesses
and concluded that these businesses no longer fit with the ongoing businesses which the Company continues to operate. Accordingly, these businesses have been



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offered for sale. The Company
also assessed the ongoing value of the long-lived assets associated with the messaging consulting business, which is being retained. Pursuant to SFAS 142 and SFAS 144 and SEC Staff Accounting Bulletin No. 100 (SAB 100), Restructuring and
Impairment Charges, the Company performed a review of its long-lived assets because those decisions represented indicators of impairment to its long-lived assets. An impairment assessment was made with respect to the long-lived assets associated
with businesses to be sold or discontinued. The assessment indicated that based on the expected selling prices of the businesses to be sold, there was significant impairment in the value of the long-lived assets associated with those businesses.
Consequently, the Company recorded impairment charges totaling $20.6 million including $6.8 million in discontinued operations ($17.8 million of identifiable intangible assets and goodwill, and $2.8 million of property and equipment) in the three
month period ended June 30, 2002. The assessment with respect to the retained consulting business indicated that, on a held for use basis, there was impairment evident in such assets. Accordingly, the Company recorded an impairment charge of $7.8
million related to the identifiable intangible assets and goodwill associated with that business in the three month period ended June 30, 2002.



In connection with the above events and circumstances, management also has re-evaluated the assigned lives used for depreciating and amortizing, as the
case may be, its remaining long-lived assets of its ongoing businesses and has concluded that the existing lives continue to be appropriate.



In response to certain events and circumstances that transpired in the first three quarters of 2001, the Company performed a review of its long-lived
assets to ascertain if such decisions resulted in impairment in its long-lived assets pursuant to SFAS. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and SAB 100, Restructuring and Impairment
Charges.



An impairment assessment was made with respect to the
long-lived assets associated with businesses to be sold or discontinued. The assessment indicated that, on a held for use basis, there was impairment evident in such assets. Consequently, the Company recorded an impairment charge in the first nine
months of 2001 of $124.2 million including $0.2 million in discontinued operations. Long-lived assets that are impaired consist of property and equipment, identifiable intangible assets and related goodwill. For purposes of measuring the potential
impairment charge, fair value was determined based on a calculation of discounted cash flows.



8DISCONTINUED OPERATIONS



Pursuant to SFAS 144 and Accounting Principles Board Opinion No. 30, Reporting the Results of
OperationsReporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions (APB 30), the Company has classified the results of certain of the businesses sold in 2002
and 2001 as discontinued operations. Accordingly, the results of operations and the assets and liabilities of those businesses have been reclassified as discontinued operations for all periods presented. During 2002, Telephonetics, Inc., Softlink,
Inc. (Peoplesoft professional services) and Interliant Texas, Inc. (Oracle professional services) were discontinued, and in the third quarter of 2001, the Company discontinued its Managed Enterprise Resource Planning (ERP) and Customer Relationship
Management (CRM) hosting, outsourcing and related hosting services business, operated through rSP.



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The summary
unaudited results of the discontinued operations for the three and nine months ended September 30, 2002 and 2001 are shown below (in thousands):



|                        |  | Three months ended |       | Nine months ended |  
|----------------------- |  | ------------------ | ----- | ----------------- | -
|                        |  | September 30       |       | September 30      |  
|                        |  | 2002               |       | 2001              |  
|Revenues                |  | $                  | 1,382 |                   | $
|Operating income (loss) |  | $                  | 300   |                   | $



Summary balance sheet
information with respect to the discontinued operations as of September 30, 2002 and December 31, 2001 (in thousands):



|                            |  | September 30 |       |   | December 31, |  
|--------------------------- |  | ------------ | ----- | - | ------------ | -
|                            |  | 2002         |       |   | 2001         |  
|Current assets              |  | $            | 1,050 |   |              | $
|Property and equipment, net |  |              | 133   |   |              |  
|Intangibles, net            |  |              | 3,293 |   |              |  
|Other assets                |  |              | 20    |   |              |  
|Current liabilities         |  |              | (446  | ) |              |  
|                            |  |              |       |   |              |  
|Net assets                  |  | $            | 4,050 |   |              | $
|                            |  |              |       |   |              |  



9. SEGMENT INFORMATION



The Company has two
reportable segments, Managed Infrastructure Solutions and Professional Services. The Web Hosting segment was phased out in 2001, and the associated results from 2001 are captured in the other segments. The summary unaudited results of operations for
the three and nine months ended September 30, 2002 and 2001 for each of the segments is shown in the following table, 2001 amounts have been reclassified for discontinued operations:



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|(In thousands)                                                        |  | Three Months Ended September 30, |        |   | Nine Months Ended September 30, |  
|--------------------------------------------------------------------- |  | -------------------------------- | ------ | - | ------------------------------- | -
|                                                                      |  |                                 
|                                                                      |  | 2002                             |        |   | 2001                            |  
|                                                                      |  |                                  |        |   | (Reclassified)                  |  
|Revenues:                                                             |  |                                  |        |   |                                 |  
|Managed Infrastructure Solutions                                      |  | $                                | 6,899  |   |                                 | $
|Professional Services                                                 |  |                                  | 2,827  |   |                                 |  
|Other                                                                 |  |                                  |       |   |                                 |  
|                                                                      |  |                                  |        |   |                                 |  
|Total                                                                 |  | $                                | 9,726  |   |                                 | $
|                                                                      |  |                                  |        |   |                                 |  
|                                                                     
|Income (loss) before interest, reorganization items and other income: |  |                                  |        |   |                                 |  
|Managed Infrastructure Solutions                                      |  | $                                | (1,884 | ) |                                 | $
|Professional Services                                                 |  |                                  | 255    |   |                                 |  
|Other                                                                 |  |                                  | (3,365 | ) |                                 |  
|                                                                      |  |                                  |        |   |                                 |  
|Total                                                                 |  | $                                | (4,994 | ) |                                 | $
|                                                                      |  |                                  |        |   |                                 |  



|                                 |  | September 30, 2002 |        | December 31, 2001
|-------------------------------- |  | ------------------ | ------ | -----------------
|                                 |  |                    |        | (Restated)       
|Segment Assets:                  |  |                    |        |                  
|Managed Infrastructure Solutions |  | $                  | 8,393  |                  
|Professional Services            |  |                    | 3,223  |                  
|Other                            |  |                    | 11,156 |                  
|                                 |  |                    |        |                  
|Total                            |  | $                  | 22,772 |                  
|                                 |  |                    |        |                  



The Companys
management generally reviews the results of operations of each segment exclusive of depreciation and amortization, corporate expenses, non-cash compensation, restructuring expenses and asset impairment losses related to each segment. Accordingly,
such expenses are excluded from the segment operating income (loss) and are shown under the Other caption. In addition, all intangible assets and corporate assets of the Company are included in the Other caption in segment assets. At the beginning
of 2002, Interliant UK Limited, the Companys United Kingdom based subsidiary, transitioned to Managed Infrastructure Solutions from the Professional Services segment, and 2001 results were restated accordingly. The segment financial statements
exclude the results of discontinued operations.



10. SUBSEQUENT EVENTS



Pursuant to an order
entered by the Bankruptcy Court in October 2002, the Company completed the sale of the assets and operations that it used to provide private-label shared and high-volume dedicated Web hosting to Sprint Communications Company L.P. (Sprint). The total
sales price was $5.0 million of which $2.5 million has been placed in escrow. Of the remaining $2.5 million, the Company received $0.2 million in cash and the balance was applied to liquidate existing obligations owed by the Company to Sprint. The
escrow funds were paid to Interliant upon the satisfaction of certain agreed milestones relating to the successful transition of the Web hosting business to Sprint.



On April 11, 2003, the Company entered into an asset purchase agreement (APA) with an affiliate of Pequot Capital
Management, Inc. (Pequot) to sell substantially all of its operations and assets, less certain liabilities. The closing of the transactions contemplated by the APA is subject to Bankruptcy Court approval and other conditions. The APA
provides for a cash payment of up to $4.7 million and assumption of not more than $5.8 million of liabilities, with final amounts determined at the closing date. Upon closing of this transaction, the remaining assets of the Company, including the
proceeds received from the sale, will be distributed to the Companys creditors, without any distribution to the Companys stockholders.



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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



You should read the following description of our financial condition and results of operations in conjunction with the Consolidated Financial Statements
and the Notes thereto included elsewhere in this report on Form 10-Q. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties.



Forward-Looking Statements And Associated Risks



This Form 10-Q contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. Certain forward-looking statements relate to, among other things, future results of operations, profitability, growth plans,
sales, expense trends, capital requirements and general industry and business conditions applicable to our business. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Our
actual results and the timing of certain events may differ significantly from the results discussed in the forward-looking statements. These forward-looking statements are based largely upon our current expectations and are subject to a number of
risks and uncertainties. The words anticipate, believe, estimate and similar expressions used herein are generally intended to identify forward-looking statements. In addition to the other risks described
elsewhere in this report and in other filings by the Company with the Securities and Exchange Commission, to which you are referred, important factors to consider in evaluating such forward-looking statements include but are not limited to: any
actions during or as a result of our pending bankruptcy proceeding, the uncertainty that demand for our services will increase and other competitive market factors; changes in our business strategy; an inability to execute our strategy due to
unanticipated changes in our business, our industry or the economy in general; difficulties in retaining and attracting new employees or customers; difficulties in developing or deploying new services; risks associated with rapidly changing
technology; and various other factors that may prevent us from competing successfully or profitably in existing or future markets. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained
herein will in fact be realized and we assume no obligation to update this information.



Overview



We are a provider of
managed infrastructure solutions, encompassing messaging, security, and hosting, plus an integrated set of professional services that differentiate and add customer value to these core solutions. We provide companies of all sizes with
cost-effective, secure infrastructure and a focused suite of e-business solutions.



We provide our customers integrated, high-level business value, from development to implementation to maintenance. Our offerings provide our customers the ability to retain critical business functions without maintaining an
IT infrastructure and staff that are not central to their core competencies. We focus on the critical technologies necessary to support their business successInternet, collaboration, messaging, security, applications, internal systems, network
systems and infrastructure.



The accompanying financial
statements have been prepared assuming we will continue as a going concern. For the period from inception to September 30, 2002, we have incurred net losses and negative cash flows from operations, and also have expended significant funds for
capital expenditures (property and equipment) and the acquisitions of businesses. As of September 30, 2002, we had working capital of $2.0 million, including cash and cash equivalents of $1.1 million.



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On August 5, 2002 (the Filing
Date), we and our domestic subsidiaries (including indirectly owned subsidiaries) filed voluntary petitions in the United States Bankruptcy Court for the Southern District of New York (the Court) for reorganization under Chapter 11 (the Bankruptcy
Case) of the United States Bankruptcy Code (the Bankruptcy Code). The necessity for filing under the Bankruptcy Code, in addition to the continued negative cash flow from operations, was attributable primarily due to our inability to collect funds
due from the prior sales of business units, a delay in the anticipated sale of one of our business units and continued weakening of market conditions.



On the Filing Date, Bruce Graham, our President and CEO resigned but retained his seat on our Board of Directors. Also on that date Messrs. Dircks, C.
Feld and Halpern resigned as directors and Francis J. Alfano, our then Chief Financial Officer was appointed our President and CEO.



In September 2002, we secured from a financial institution Debtor-in-Possession (DIP) financing. We expect the financing, in the form of a revolving
accounts receivable credit facility, to provide us with sufficient funds to operate our business until we complete the sales of certain businesses, negotiate relief from lease obligations and settle other obligations.



We have grown our business by acquiring numerous operating companies providing
managed infrastructure solutions, Web hosting and professional services solutions, for total consideration of approximately $218.2 million. The purchase consideration for the acquisitions was in the form of cash, stock or a combination of cash,
stock and issuance of debt. The acquisitions have been accounted for using the purchase method of accounting, which has resulted in the recognition, as of September 30, 2002, of approximately $206.9 million of intangible assets. During 2001 and in
the first nine months of 2002, we recorded impairment charges for goodwill and other intangibles of $87.0 million of net book value of such assets, including $7.0 million in discontinued operations. As of September 30, 2002, the net book value of
goodwill and intangibles was $0.0 million. Recoverability of the remaining net book value of intangible assets is dependent on our ability to successfully operate our businesses and generate positive cash flows from operations. See notes 2 and 7 of
Notes to Consolidated Financial Statements in this report on Form 10-Q and Results of Operations-Restructuring and Impairment Charges set forth below.



Our principal sources of cash to fund the aforementioned activities were from the sale of $152.3 million in Common and
Preferred Stock in public and private sales, the sale of $164.8 million in the aggregate principal amount of 7% Convertible Subordinated Notes (7% Notes), the sale of units comprising $19.0 million in the aggregate principal amount of 8% Convertible
Subordinated Notes (8% Notes) and warrants to purchase shares of our Common Stock, and the sale of units comprising $10.0 million of 10% Convertible Subordinated Notes (10% Subordinated Notes) and warrants to purchase shares of our Common Stock.



As of September 30, 2002, we had an accumulated deficit of
$441.6 million. The revenue and income potential of our business is unproven and our limited operating history makes an evaluation of our prospects difficult.



We expect to continue to incur operating losses, including depreciation and amortization expense, as well as negative operating cash flows for the
foreseeable future. We cannot be assured that we will ever achieve profitability on a quarterly or annual basis, or, if achieved, that we will sustain profitability.



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Restructuring and
Impairment Charges



During the latter half of the first
quarter of 2001, we experienced a substantial decline in revenues and new sales orders. There were negative economic developments and trends that occurred during this period in our industry sector, including reduced corporate information technology
spending, the failure of many Internet-related companies, and sharply reduced sales forecasts. All of these factors caused us to re-evaluate our business focus and operating plans for the remainder of 2001 and beyond. Such decisions gave rise to the
following actions: Based on a decision reached by our management and the Board of Directors in late March 2001, on April 2, 2001 we announced a restructuring plan (the April Plan or Restructuring) to further streamline the business by narrowing our
services focus to a core set of offerings.



In conjunction with
the restructuring, we undertook a review of our long-lived assets pursuant to SFAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and SAB No. 100, Restructuring and Impairment Charges, to
ascertain if these decisions and changed conditions caused an impairment charge. The assessment indicated that, on a held for use basis, there was impairment evident in such assets. Further, based on our assessment of internal and external facts and
circumstances to which the impairment was attributable, we concluded that the impairment indicators arose in the latter half of the first quarter of 2001. In connection therewith we recorded impairment charges aggregating $36.5 million in the six
month period ended June 30, 2001. Long-lived assets that are impaired consist of property and equipment, identifiable intangible assets and related goodwill. For purposes of measuring the impairment charge, fair value was determined based on a
calculation of discounted cash flows or net realizable value if known.



The April Plan was executed in two phases. Phase 1, which began on April 3, 2001, consisted of a workforce reduction of approximately 200 positions, and resulted in a charge for the payment of severance and related costs of
approximately $1.7 million. This charge was recognized in the second quarter of 2001.



Phase 2 of the April Plan included exiting, via sales, certain businesses that we determined to be outside of the redefined scope of our service offerings along with additional workforce reductions. In July 2001, we exited
the Managed Enterprise Resource Planning (ERP) and Customer Relationship Management (CRM) product lines of our managed infrastructure solutions segment, formerly known as reSOURCE PARTNER, Inc. (rSP), which had been a key component of our scope of
services prior to the April Plan. In August 2001, we exited the remaining operations of rSP. The 2001 losses from discontinued operations of $10.4 million include losses incurred prior to July 2001 of approximately $6.5 million, and the estimated
losses on disposal of $3.9 million. We have retained approximately $1.3 million of rSP assets, consisting primarily of computer equipment and software. As of September 30, 2002, rSP had no net liabilities.



In July 2001, we announced a further business restructuring that included
additional workforce reductions of approximately 70 positions and a plan to exit certain leased office facilities. We recognized a restructuring charge of $3.6 million during the second half of 2001 for the qualifying costs. In the three months
ended March 31, 2002 we recorded an additional $0.2 million of restructuring charges to update estimates made for exiting leased facilities.



In October 2001, we sold another of our non-core businesses, our shared and unmanaged dedicated retail Web hosting business. At that time, we continued to
focus our strategy on OEM, private label and referral partner Web hosting services through our branded solutions offerings.



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In connection with the
disposition of our investment in Interliant Europe, B.V. (Interliant Europe), we conducted an impairment assessment with respect to the long-lived assets associated with Interliant Europe, and the assessment indicated that there was impairment
evident in such assets. The fair value of the long-lived assets was determined based on the terms of the definitive agreement that we executed in August 2001. Consequently, we recorded an impairment charge of $4.7 million, to write-off the entire
net book value of property and equipment ($4.4 million), identifiable intangible assets ($0.2 million) and other long-term assets ($0.1 million) related to Interliant Europe.



We also determined that there were potential impairment indicators present in our core hosting and professional services
businesses that arose during the third quarter of 2001 as a result of the continued economic uncertainties in general, certain weaknesses in our market and lack of revenue growth for the Company in particular. Accordingly, we conducted an impairment
assessment with respect to long-lived assets associated with such businesses. Further, for businesses previously identified for sale or disposition, we updated the fair value determination based on more current pricing terms from recent negotiations
with prospective buyers. Based on these assessments, we determined that there was impairment evident in the assets associated with our core hosting businesses and the PeopleSoft ERP professional services business. Consequently in the three month
period ended September 30 2001, we recorded impairment charges of $85.5 million to write-off the net book value of certain of the fixed assets, including software, used in those businesses ($51.4 million), other long term assets ($1.4 million) and
identifiable intangible assets and goodwill ($32.7 million) related to those businesses.



In the first quarter of 2002, based on the pending sale of one of the business units included in the Professional Services segment, we recorded an impairment loss with respect to the intangible assets associated with that
unit of $1.0 million.



During the second quarter of 2002, we
re-evaluated the future prospects of our web hosting services offered through private label arrangements, our security products and services business and our Oracle consulting businesses. We concluded that these businesses no longer fit with the
within the focus of our core offerings and that the sale of these business units would help reduce operating losses and provide funds to support the efforts necessary to reach profitability for our ongoing business.



In August 2002, we disposed of the security products and services business,
and we entered into negotiations to sell the Oracle consulting business. In addition, in October 2002 we sold our private label hosting business. We also assessed the ongoing value of the long-lived assets associated with the collaboration and
messaging consulting business, which is being retained. Pursuant to Statement of Financial Accounting Standards No. (SFAS) 142, Goodwill and Other Intangible Assets (SFAS 142), and No. 144 Accounting for Impairment of Long Lived Assets
(SFAS 144) and SEC Staff Accounting Bulletin No. 100 (SAB 100), Restructuring and Impairment Charges, we performed a review of our long-lived assets because those decisions represented indicators of impairment to our long-lived assets. An
impairment assessment was made with respect to the long-lived assets associated with businesses to be sold or discontinued. The assessment indicated that based on the expected selling prices of the businesses to be sold, there was significant
impairment in the value of the long-lived assets associated with those businesses. Consequently, in the six month period ended June 30, 2002, we recorded impairment charges totaling $20.6 million including $6.8 million in discontinued operations
($17.8 million of identifiable intangible assets and goodwill, and $2.8 million of property and equipment). The assessment with respect to the retained consulting business indicated that, on a held for use basis, there was impairment evident in such
assets. Accordingly, we recorded an impairment charge of $7.8 million of identifiable intangible assets and goodwill associated with that business.



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In connection with the above
events and circumstances, management also has re-evaluated the assigned lives used for depreciating and amortizing, as the case may be, our remaining long-lived assets of our ongoing businesses and has concluded that the existing lives continue to
be appropriate.



Critical Accounting Policies



The discussion and analysis of our financial condition and
results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amount of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these
estimates under different assumptions or conditions.



Critical
accounting policies are defined as those that are reflective of significant judgments and uncertainties, and potentially result in materially different results under different assumptions and conditions. We believe that our critical accounting
policies are primarily related to revenue recognition, as described below in Results of Operations. For a detailed discussion on the application of these and other accounting policies, see Note 2 in the Notes to Consolidated Condensed
Financial Statements herein and Note 2 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2001.



Results of Operations



Our reportable segments currently include managed infrastructure solutions and professional services. Our web hosting business was previously classified
as a third segment but was sold in October 2001. Our current major lines of business included in each of these segments are as follows:



|Managed Infrastructure Solutions    |  | Professional Services                                         
|----------------------------------- |  | --------------------------------------------------------------
|Managed Messaging and Collaboration |  | Messaging and Collaboration Services                          
|Managed Hosting Managed Security    |  | Security and Networking Solutions (Disposed of in August 2002)
|Branded Web Hosting (Private Label) |  | Enterprise Resource Planning (ERP)                            



Our revenue streams
consist of recurring service fees, and non-recurring professional services and product sales. We sell managed infrastructure solutions for contractual periods generally ranging from one month to three years. Hosting revenues are recognized ratably
over the contractual period as services are performed. Incremental fees for excess bandwidth usage and data storage are billed and recognized as revenue in the period that customers utilize such services. Payments received and billings made in
advance of providing hosting services are deferred until the services are provided.



Professional services revenues generally are recognized as the services are rendered, provided that no significant obligations remain and collection of the receivable is considered probable. Substantially all of our
professional services contracts call for billings on a time and materials basis. Some of our contracts contain milestones and/or customer acceptance provisions. For these contracts, revenue is recognized as milestones are performed and accepted by
the customer or when customer acceptance is attained.



Certain
customer contracts contain multiple elements under which we sell a combination of any of the following: managed infrastructure solutions and professional services, computer equipment, software



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licenses and maintenance
services to customers. We have determined that objective evidence of fair value exists for all elements and have recorded revenue for each of the elements as follows: (1) revenue from the sale of computer equipment and software products is recorded
at the time of delivery; (2) revenue from service contracts is recognized as the services are performed; and (3) maintenance revenue and related costs are recognized ratably over the term of the maintenance agreement.



Under certain arrangements, we resell computer equipment and/or software and
maintenance purchased from various computer equipment and software vendors. We are recording the revenue from these products and services on a gross basis pursuant to Emerging Issues Task Force (EITF) 99-19, Reporting Revenue Gross as a Principal
versus Net as an Agent. Under these arrangements, we determined that we are the primary obligor. We present the end-user with a total solution from a selection of various vendor products, set final prices and perform certain services. Additionally,
we have credit and back-end inventory risk.



In some
circumstances we resell software, and in connection with such sales, we apply the provisions of Statement of Position (SOP) 97-2, Software Revenue Recognition, as amended by SOP 98-4. Under SOP 97-2, we recognize license revenue upon shipment of a
product to the end-user if a signed contract exists, the fee is fixed and determinable and collection of the resulting receivable is probable. For contracts with multiple elements (e.g., software products, maintenance and other services), we
allocate revenue to each element of the contract based on vendor specific objective evidence of the elements fair value.



Cost of revenues primarily consists of salaries and related expenses associated with professional services and data center operations, data center
facilities costs, costs of hardware and software products sold to customers, and data communications expenses, including one-time fees for circuit installation and variable recurring circuit payments to network providers. Monthly circuit charges
vary based upon circuit type, distance and usage, as well as the term of the contract with the carrier.



Sales and marketing expense consists of personnel costs associated with the direct sales force, internal telesales, product development and product marketing employees, as well as costs associated with
marketing programs, advertising, product literature, external telemarketing costs and corporate marketing activities, including public relations.



General and administrative expense includes the cost of customer service functions, finance and accounting, human resources, legal and executive salaries,
corporate overhead, acquisition integration costs and fees paid for professional services.



The following is a discussion of our results from continuing operations for the three and nine months ended September 30, 2002 and 2001.



Three Months Ended September 30, 2002 and 2001



Revenues



Revenues decreased $9.5 million, from $19.2 million for the three months ended September 30, 2001 to $9.7 million for the corresponding 2002 period. The
decrease in revenues was due primarily to the disposition of the Retail Web hosting business in the fourth quarter of 2001, reduced revenues from the Professional Services segment, and the sale of the security products and services business in
August 2002.



Managed Infrastructure revenues decreased $2.1
million, from $9.0 million for the three months ended



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September 30, 2001 to $6.9
million for the corresponding 2002 period. Web hosting revenues were $3.1 million in the 2001 period and were not present in the corresponding 2002 period due to the sale of that business.



Professional Services revenues decreased $3.9 million, from $6.7 million during the three months ended September 30, 2001 to
$2.8 million for the corresponding 2002 period. This decrease was the result of reduced activity in the information technology sector and the security products and services business in August 2002. The security products business had quarterly
revenues of $2.3 million and $7.4 million in 2002 and 2001, respectively.



Cost of Revenues



Cost of revenues
decreased by $6.8 million, from $12.7 million for the three months ended September 30, 2001 to $5.9 million for the corresponding 2002 period. This decrease was due primarily to the absence of costs related to the Web hosting business, aggressive
cost reduction initiatives, and staff reductions resulting from the 2001 restructuring plans.



Gross margin for the three months ended September 30, 2002 and 2001 was 39.0% and 33.8%, respectively. The increase in gross margin is primarily the result of a higher proportion of revenue from our
managed infrastructure solution services, which typically generate higher gross margins as compared to Professional Services and product revenues. Gross margin from the sale of products was 18.0% and 21.2% for the three months ended September 30,
2002 and 2001, respectively. The decrease in gross margin was the result of contraction in our product business and decreasing margins in the product business in general.



Sales and Marketing



Sales and marketing expense decreased by $1.7 million, from $3.9 million for the three months ended September 30, 2001 to $2.2 million for the
corresponding 2002 period. This decrease was attributable primarily to the elimination of marketing expenditures related to the Retail Web hosting business and a company wide initiative to reduce expenses.



General and Administrative



General and administrative expense (excluding non-cash compensation)
decreased by $8.7 million, from $13.9 million for the three months ended September 30, 2001 to $5.2 million for the corresponding 2002 period. This decrease in general and administrative expense was attributable to the elimination of costs related
to the Retail Web hosting business, reductions in compensation and other expenses as a result of the restructuring and cost reduction initiatives.



Non-cash compensation



During the three months ended September 30, we recorded non-cash compensation charges aggregating $0.1 million in both 2002 and 2001. Non-cash
compensation costs stem from stock issuances to The Feld Group for payment of executive-level services rendered under its contract with us and amortization of warrant issuances and option grants in 2001 to The Feld Group. This agreement was
terminated as of July 31, 2002 and no further issuances of stock will be made under that agreement.



Depreciation



Depreciation expense decreased by $6.2 million, from $7.6 million for the three months ended September



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30, 2001 to $1.4 million for
the corresponding 2002 period. The decrease in depreciation expense was attributable to the reduction in cost basis in our fixed assets as a result of impairment charges recorded in 2001, which reduced the ongoing periodic depreciation on the
remaining asset values and due to the reduction of assets resulting from the sales of business units



Amortization of Intangible Assets



Amortization expense decreased by $9.8 million, from $9.8 million for the three months ended September 30, 2001 to $0.0 million for the corresponding 2002 period. This decrease in amortization expense was attributable to the
reduction in the carrying value of our intangible assets as a result of impairment charges recorded in 2001 as well as the elimination of amortization of the majority of our intangible assets pursuant to the provisions of SFAS 142. In the future, we
will be required to make periodic assessments of the fair value of our intangible assets and record impairment charges if the assessment shows a value less than the carrying value.



Impairment Loss on Long-lived Assets



In the three months ended September 30 2002, we had no impairment losses on long-lived assets. The 2001 impairment charges of
$82.7 million were attributable to losses realized for our core hosting businesses and our PeopleSoft professional services business. Based on assessments made during the three months ended September 30, 2001, we determined that there was impairment
evident in the assets associated with our core hosting businesses and the PeopleSoft ERP professional services business. Consequently, we recorded an impairment charges in the third quarter of 2001 to write-off the net book value of certain of the
fixed assets used in those businesses ($49.2 million) and identifiable intangible assets and goodwill ($32.5 million) related to those businesses. In addition, we recorded an impairment charge of approximately $1.0 million during the three months
ended September 30, 2001 to reflect the decline of the fair market value of our restricted investments in certain non-public companies.



Reorganization costs



During the three months ended September 30, 2002, as a result of the chapter 11 filing, we incurred net reorganization costs of $1.2 million. The
principal components of these costs were professional fees of $1.0 million, $0.8 million amortization of debt discount offset by reductions in operating lease obligations and other liabilities of $0.6 million.



Gain on sales of businesses



In the three months ended September 30, 2002, gain on sales of businesses was
$1.2. million related to the businesses sold in 2002 and contingent payments related to the sale of a business in the fourth quarter of 2001. There were no gains or losses on sales of businesses in the three months ended September 30, 2001.



Interest income (expense)



Net interest expense decreased $6.5 million from $7.3 million in the three
months ended September 30, 2001 to $0.8 million in the comparable 2002 period. Interest expense decreased $6.8 million, from $7.6 million in the three months ended September 30, 2001 to $0.8 million in the comparable 2002 period due primarily to the
net reduction in interest expense related to our 7% Notes which were restructured in an exchange transaction in December 2001 through the issuance of 10% Convertible Senior Notes (10% Senior Notes) in the aggregate principal amount of approximately
27% of the face amount of the 7% Notes. Pursuant to provisions of SFAS No. 15, Accounting by Debtors and Creditors for Troubled Debt



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Restructurings, (SFAS
15) all of the interest on the 10% Senior Notes to maturity (2006) was recorded at the time of the restructuring and consequently, no interest is recorded on the 10% Senior Notes in the current period. In addition, as a result of the chapter 11
filing, no interest has been accrued on debt outstanding on the filing date. This reduction was partially offset by increased interest expense resulting from notes sold to Charterhouse Equity Partners III L.P. and Mobius Technology Ventures VI LP
(formerly Softbank) and affiliates (collectively the Investors) in the end of the first quarter of 2002 and third quarter of 2001. We had no significant interest income in the three month period ended September 30, 2002, compared to interest income
of $0.2 million in the comparable 2001 period, due to the reduced amount of cash available to invest.



Nine Months ended September 30, 2002 and 2001



Revenues



Revenues decreased $24.4 million, from $62.8 million for the nine months ended September 30, 2001 to $38.4 million for the corresponding 2002 period. The decrease in revenues was due primarily to the disposition of the Retail Web
hosting business in the fourth quarter of 2001, reduced revenues from the Professional Services segment and the sale of the security products and services business in August 2002.



Managed Infrastructure revenues decreased $3.7 million, from $27.1 million for the nine months ended September 30, 2001 to
$23.4 million for the corresponding 2002 period. Web hosting revenues were $10.7 million in the 2001 period.



Professional Services revenues decreased $6.7 million, from $21.7 million during the nine months ended September 30, 2001 to $15.0 million for the corresponding 2002 period. This decrease was the
result of reduced activity in the information technology sector and the security products and services business in August 2002. The security products and services business had revenues of $12.8 million and $22.0 million in the first nine months of
2002 and 2001, respectively.



Cost of Revenues



Cost of revenues decreased by $17.0 million, from $40.2
million for the nine months ended September 30, 2001 to $23.2 million for the corresponding 2002 period. This decrease was due primarily to the absence of costs related to sold Web hosting business, aggressive cost reduction initiatives and staff
reductions resulting from the 2001 restructuring plans.



Gross
margin for the nine months ended September 30, 2002 and 2001 was 39.6% and 36.0%, respectively. The increase in gross margin is primarily the result of a higher proportion of revenue from our managed infrastructure solution services, which typically
generate higher gross margins as compared to Professional Services and product revenues. Gross margin from the sale of products was 16.3% and 18.8% for the nine months ended September 30, 2002 and 2001, respectively. The decrease in gross margin was
the result of a contraction in our product business and decreasing margins in the product business in general.



Sales and Marketing



Sales and marketing expense decreased by $14.7 million, from $24.0 million for the nine months ended September 30, 2001 to $9.3 million for the corresponding 2002 period. This decrease was attributable primarily to the elimination of
marketing expenditures related to the Retail Web hosting business and to a



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company-wide initiative to
reduce expenses.



General and Administrative



General and administrative expense (excluding non-cash compensation)
decreased by $26.3 million, from $45.4 million for the nine months ended September 30, 2001 to $19.1 million for the corresponding 2002 period. This decrease in general and administrative expense was attributable to the elimination of costs related
to the Retail Web hosting business, reductions in compensation and other expenses as a result of the restructuring and other cost reduction initiatives.



Non-cash compensation



Non-cash compensation expense increased by $5.5 million, from negative $4.7 million in the nine months ended September 30, 2001, to $0.8 million in the
comparable period in 2002.



The negative non-cash compensation
expense recorded in the nine months ended September 30, 2001 related to options we issued in January 2000 to purchase 1.5 million shares of Common Stock at an average exercise price of $18.00 per share to our CEO at that time. The average exercise
price of the options was below the fair value of the Common Stock as of the measurement date, which required the recognition of approximately $30.0 million as compensation expense over the four-year vesting period of the options on a graded vesting
basis. In April 2001, our former CEO terminated his employment with us. In connection therewith, we recorded an adjustment in the quarter ended June 30, 2001 to reverse compensation charges aggregating approximately $8.4 million recorded in prior
periods to reflect the excess of the charges recognized on a graded vesting basis over the value of the options that ratably vested as of the date of his termination. There is no compensation charge in 2002 related to such options.



During the nine months ended September 30, 2002, we recorded non-cash
compensation charges aggregating $0.8 million stemming from (a) stock issuances (i) to one of our Co-Chairmen in lieu of all cash compensation due under his employment agreement for the current term, (ii) to certain of our senior executive officers
in lieu of a portion of their cash compensation for the balance of 2002, and (iii) to The Feld Group for payment for executive-level services rendered under its contract with us and (b) amortization of warrant issuances and option grants in 2001 to
The Feld Group. As a result of the resignation on August 1, 2002 of Bruce Graham, a member of The Feld Group, as our Chief Executive Officer and President, no further issuances of our stock will be made to The Feld Group under this contract.
Effective August 1, 2002 and on a prospective basis only, five of those senior executive officers who previously received shares of our common stock in exchange for a reduction in their cash compensation, had their cash compensation reinstated to
the levels that existed prior to the reduction.



Depreciation



Depreciation expense decreased by $17.4 million, from $22.4
million for the nine months ended September 30, 2001 to $5.0 million for the corresponding 2002 period. The decrease in depreciation expense was attributable to the reduction in cost basis in our fixed assets as a result of impairment charges
recorded in 2001, which reduced the ongoing periodic depreciation on the remaining asset values.



Amortization of Intangible Assets



Amortization expense decreased by $31.7 million, from $32.4 million for the nine months ended September 30, 2001 to $0.7 million for the corresponding 2002 period. This decrease in amortization expense was attributable to
the reduction in the carrying value of our intangible assets as a result of



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impairment charges recorded in
2001 as well as the elimination of amortization of the majority of our intangibles pursuant to the provisions of SFAS 142. In the future, we will be required to make periodic assessments of the fair value of our intangible assets and record
impairment charges if the assessment shows a value less than the carrying value.



Impairment Loss on Long-lived Assets



In
the nine months ended September 30, 2002, in conjunction with the disposition and proposed dispositions of two of our business units and continued deterioration of our remaining businesses, we performed a review of our long-lived assets to ascertain
if such decisions resulted in an impairment in our long-lived assets pursuant to SFAS 142, and SAB 100, Restructuring and Impairment Charges. An impairment assessment was made with respect to the long-lived assets associated with businesses to be
sold or discontinued. The assessment indicated that based on the expected selling prices of the businesses to be sold, which were lower than the carrying value of the assets to be sold, there was significant impairment in the value of the long-lived
assets associated with those businesses. Consequently, we recorded impairment charges totaling $21.6 million including $6.8 million in discontinued operations ($18.8 million of identifiable intangible assets and goodwill, and $2.8 million of
property and equipment) for businesses to be sold in the nine months ended September 30, 2002. The assessment with respect to the retained consulting business indicated that, on a held for use basis, there was impairment evident in such assets.
Accordingly, we recorded an impairment charge of $7.8 million related to the identifiable intangible assets and goodwill associated with that business.



In the nine months ended September 30, 2001, we recorded impairment charges with respect to long-lived assets associated with businesses to be sold or
discontinued aggregating $124.0 million. Long-lived assets that were impaired consisted of property and equipment ($62.2 million), identifiable intangible assets and goodwill ($60.3 million) and other long-term assets ($1.5 million).



Reorganization costs



During the nine months ended September 30, 2002, as a result of the Chapter
11 filing, we incurred net reorganization costs of $1.2 million. The principal components of these costs were professional fees of $1.0 million, $0.8 million in debt discount amortization offset by reductions in operating lease obligations and other
liabilities of $0.6 million



Gain on sales of businesses



In the nine months ended September 30, 2002, gain on sales
of businesses was $6.6 million related to the businesses sold in 2002 and contingent payments related to the sale of a business in the fourth quarter of 2001. There were no gains or losses on sales of businesses in the nine months ended September
30, 2001.



Interest income (expense)



Net interest expense decreased by $6.5 million from $14.0 million in the nine
months ended September 30, 2001 to $7.5 million in the comparable 2002 period. Interest expense decreased $8.0 million, from $15.7 million in the nine months ended September 30, 2001 to $7.7 million in the comparable 2002 period due primarily to the
net reduction in interest expense related to our 7% Notes which were restructured in an exchange transaction in December 2001 through the issuance of 10% Senior Notes in the aggregate principal amount of approximately 27% of the face amount of the
7% Notes. Pursuant to provisions of SFAS 15, all of the interest on the 10% Senior Notes to maturity (2006) was recorded at the time of the restructuring and consequently, no interest is recorded on the 10% Senior Notes in the current period. In
addition, as a result of the chapter 11 filing, no interest has been accrued on debt outstanding



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on the filing date. This
reduction was partially offset by increased interest expense resulting from notes sold to the Investors in the end of the first quarter of 2002 and third quarter of 2001 and the recognition of $2.7 million of interest expense related to the
beneficial conversion feature of our 10% Convertible Subordinated Notes sold in March 2002. Interest income decreased $1.5 million from $1.7 million in the nine months ended September 30, 2001 to $0.2 million in the comparable 2002 period due to the
reduced amount of cash available to invest.



Liquidity and
Capital Resources



We have financed our operations and
acquisitions to date primarily from private placements of debt and equity, and our initial public offering of Common Stock. For the period from inception to September 30, 2002, we have incurred net losses and negative cash flows from operations, and
have also expended significant funds for capital expenditures (property and equipment) and the acquisitions of businesses. As of September 30, 2002, we had working capital of $2.0 million, including cash and cash equivalents of $1.1 million.



On August 5, 2002 we and our domestic subsidiaries (including
indirectly owned subsidiaries) filed voluntary petitions in the Court for reorganization under Chapter 11 of the Code (the Bankruptcy Code). The necessity for filing under the Bankruptcy Code, in addition to the continued negative cash flow from
operations, was attributable primarily due to our inability to collect funds due from the prior sales of business units, a delay in the anticipated sale of one of our business units and continued weakening of market conditions.



The filing of the Bankruptcy Case stayed our legal obligation to make current
payments on most of the liabilities outstanding on the Filing Date, including but not limited to liabilities under our notes and capital leases. In accordance with our rights under the Bankruptcy Code, we are negotiating terminations and or
reductions in our obligations under operating leases.



In
December 2001 we consummated an exchange of $164.2 million (99.6%) of our then outstanding 7% Notes for new 10% Senior Notes, cash and warrants. Under the terms of that transaction, we issued $270 principal amount of 10% Senior Notes convertible
into 270 shares of our Common Stock, issued warrants to purchase 67.50 shares of our Common Stock at an exercise price of $0.60 per share, and paid $70 in cash in exchange for each $1,000 principal amount of 7% Notes that were tendered in that
transaction. The exchange transaction has been accounted for pursuant to SFAS 15. Accordingly, upon closing, the difference between the consideration issued and the present carrying value of the notes exchanged, reduced by the gross interest costs
from the issuance date to maturity ($27.9 million) and transaction costs on the 10% Senior Notes issued, has been treated as an extraordinary gain. Semi-annual interest payments on the 10% Senior Notes may, at our option, be made in cash or in the
form of issuing additional 10% Senior Notes thereby reducing our cash requirements. In the nine months ended September 30, 2002 we issued $2.1 million of 10% senior notes and $0.8 million of 8% notes for interest earned on such notes.



In January and February, 2002 we sold two non-core business units for
aggregate cash proceeds of $3.8 million.



On March 8, 2002 the
Investors purchased 100 units, with each unit consisting of $100,000 principal amount of our 10% Subordinated Notes and warrants for the purchase of 100,000 shares of our Common Stock for a total sales price of $10.0 million.



In May 2002, we entered into an agreement with a financial institution to
obtain a working capital financing facility, which would allow us to finance up to $7.5 million of our accounts receivable (Accounts Receivable Financing). In August 2002, as a result of the chapter 11 filing, our ability to borrow was terminated
and all amounts due under the Accounts Receivable Financing have been repaid.



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In September 2002, we entered
into a DIP financing arrangement with a lender that provides a revolving credit facility of up to $5.0 million. This DIP financing is needed to provide funds to operate our business until we complete the sales of certain businesses, negotiate relief
from lease obligations and settle other obligations. Although the financing has been obtained, there are no assurances that we will be able to sell those certain businesses, negotiate relief from those lease obligations or settle our other
obligations, or that the timing and/or the terms of these events will be favorable to us. The foregoing is a forward-looking statement and is based on our current business plan and the assumptions on which it is based, including, but not limited to,
our ability to meet revenue forecasts, receive the funding under the DIP financing, receive the anticipated proceeds from sales of businesses and contingent consideration from sales of businesses made in 2001 and 2002, reduce our cash obligations on
leases and other liabilities and continue to receive the cost savings and cash generation benefits our restructuring plans were designed to produce. If our plans change or one or more of our assumptions prove to be inaccurate, we may be required to
seek additional capital or consider the sale of certain business divisions and/or assets sooner than we currently anticipate in order to continue operations and meet our financial obligations. On September 30, 2002, the DIP facility had $1.5 million
in credit availability with no outstanding loan thereunder.



In
October 2002, we completed the sale of the assets and operations that we previously used to provide private-label shared and high-volume dedicated Web hosting to Sprint Communications L.P. (Sprint). The total sales price was $5.0 million, of which
$2.5 million has been placed in escrow. Of the remaining $2.5 million, we received $0.2 million and the balance was applied to liquidate obligations owed by us to Sprint. The escrow funds will be paid to Interliant upon the satisfaction of certain
agreed milestones relating to the successful transition of the Web hosting business to Sprint.



During the nine months ended September 30, 2002, cash used in operating activities was $8.7 million. The net loss of $52.2 million included non-cash charges for depreciation, amortization, interest and
other non-cash items totaling $36.4 million. Cash was provided by decreases in accounts receivable and prepaid and other current assets totaling $8.8 million offset by a net decrease in operating liabilities of $1.8 million.



During the nine months ended September 30, 2002, we added $1.7 million of
network software and equipment, furniture and office equipment and leasehold improvements. Such fixed asset additions were primarily driven by our data center and customer care facilities expansion and customer-driven computer equipment and
software purchases to support revenue growth.



In prior periods,
we financed in excess of $30 million of computer equipment and furniture from available lease facilities. At September 30, 2002 there were $13.9 million in equipment lease obligations outstanding, and the Court has stayed our current payments on
most of these liabilities outstanding on the filing date. While there is no additional lease financing currently available to us, we will continue to seek such financing activities and obtain additional equipment financing in the future, although no
assurances can be given that additional financing will be available when needed.



In addition to funding ongoing operations and capital expenditures, our principal commitments consist of non-cancelable operating leases and contingent earnout payments to certain sellers of operating companies acquired by us. In
connection with acquisitions completed in 1999 and 2000, as part of the purchase agreements, we agreed to make contingent earnout payments to the sellers if stated objectives were achieved. As of September 30, 2002, all contingent earnouts were
finalized and we agreed to pay an aggregate of $6.5 million, including interest at 7% per annum, in monthly or quarterly installments through January 2005. Such obligations are evidenced by notes issued to the respective sellers; however, the Court
has stayed our current payments on most of these liabilities outstanding on the filing date.



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Our objective is to achieve
the highest possible recoveries for all creditors and stockholders, consistent with our ability to continue the operation of our businesses. However, there can be no assurance that we will be able to attain these objectives or to achieve a
successful reorganization. In addition, our liabilities may be found in the Bankruptcy Cases to exceed the fair value of our assets, resulting in claims being paid at less than 100% of their face value and the equity of our stockholders being
diluted or cancelled.



Under the Bankruptcy Code, the rights of
and ultimate payments to pre-Filing Date creditors and stockholders may be substantially altered from their contractual terms. At this time, it is not possible to predict the outcome of the Bankruptcy Case, in general, or the effect of the
Bankruptcy Case on our businesses or on the interests of our creditors and stockholders.



We anticipate that substantially all liabilities of ours as of the Filing Date will be resolved under one or more plans of reorganization to be proposed and voted on in the Bankruptcy Case in accordance with the Bankruptcy
Code. Although we intend to file and seek confirmation of such a plan or plans, there can be no assurance that we will file such a plan or plans, and that if we do file such a plan or plans then as to when such plan or plans will be confirmed by the
Court and consummated.



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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK



We have limited exposure to financial market risks, including changes in interest rates. Substantially all of our indebtedness bears interest at a fixed rate to maturity, which therefore minimizes our
exposure to interest rate fluctuations.



ITEM 4. CONTROLS AND PROCEDURES



Evaluation of Disclosure Controls and Procedures



The Companys chief executive officer and principal financial officer, after evaluating the effectiveness of the Companys disclosure controls and procedures (as defined in Rule 13a-14(c) under the Securities
Exchange Act of 1934, as amended) as of a date (the Evaluation Date) within 90 days before the filing date of this quarterly report, have concluded that the Companys disclosure controls and procedures are effective in ensuring that material
information required to be disclosed is included in the reports that it files with the Securities and Exchange Commission.



Changes in Internal Controls



There were no significant changes in the Companys internal controls or, to the knowledge of the management of the Company, in other factors that
could significantly affect these controls subsequent to the Evaluation Date.



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##### Table of Contents



PART II.
OTHER INFORMATION



ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS



Pursuant to the Companys April 2002 amended agreement with The Feld Group, Inc., Interliant issued 333,333 shares of its restricted Common Stock in lieu of cash compensation for services rendered to The Feld Group, Inc. on each
of May 31, 2002, June 28, 2002 and July 31, 2002.



In June 2002,
the Company paid interest due to the holders of the Companys 10% Convertible Senior Notes due 2006 (the 10% Senior Notes) in the aggregate principal amount of $2,091,825.50 in the form of Additional Securities, or PIK Notes,
pursuant to the Indenture dated as of December 15, 2001 between Interliant and The JP Morgan Chase Bank relating to the Senior Notes.



On July 1, 2002, the Company issued additional 8% Convertible Subordinated Notes dues June 30, 2003 (8% Notes) to Charterhouse Equity Partners III L.P.
and Mobius Technology Ventures VI L.P. and its related funds in the aggregate principal amount of $ 399,481 as the interest payment on the 8% Notes issued in August of 2001 in the aggregate original principal amount of $19,000,000, and as
interest on similar 8% Notes previously issued each quarter since August 2001 as payment of accrued interest on the previously issued 8% Notes. The notes issued as interest have the same terms as the original 8% Notes.



All issuances of securities described in this item 2 were to accredited
investors and effected upon reliance of exemption from registration contained in Section 4(2) if the Securities Act of 1933, as amended, as a transaction not involving a public offering.



ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



|     
|-----
|10.65
|     
|10.66
|     
|10.67
|     
|10.68
|     
|99-1 
|     
|99-2 



|* |  | Previously filed as an exhibit to the Companys Form 10Q for the Quarter ended September30, 2002 and included herein by reference.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------



|** |  | Filed herewith
|-- |  | --------------



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##### Table of Contents



(b) Reports on Form 8-K:



Form 8-K filed on October 1, 2002 whereby Interliant announced
that it had closed on Debtor-In-Possession financing with Access Capital, Inc.



Form 8-K filed on November 4, 2002 whereby Interliant announced that it closed on the sale to Sprint of the assets and operations that it had used to provide private-label and high-volume dedicated Web hosting to Sprint.



SIGNATURES



Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



|                     |  |  |  | Interliant, Inc.                     
|-------------------- |  |  |  | -------------------------------------
|                    
|Date: April 14, 2003 |  |  |  | /s/    FRANCIS J.
ALFANO             
|                     |  |  |  | Francis J. Alfano                    
|                     |  |  |  | Chief Executive Officer and President



|                    
|--------------------
|Date: April 14, 2003
|                    
|